The first half of 2014 is drawing to a close but the wait continues for a strong economic upturn that would globally spark sustainable sales growth in the high-tech industry. So far, what many industry observers and economists can point to is selective growth in certain markets, weakness in others and wide differences in regional performance. All of these point to the likelihood that economic forecasts and corporate sales and profits projections made at the beginning of this year may not materialize.
Economic conditions globally aren’t suggesting a roaring second half but neither are they indicative of a softening world market, according to the International Monetary Fund. Anyone looking for strong growth, though, should expect this to emerge only in 2015 rather than this year. Economic activities picked up pace in the first half but not at the level that would have sparked solid, mid-to-upper single digit growth rate. Moreover, the level of demand varies widely by region and even within regional economic zones, the IMF said in its latest World Economic Outlook report.
“The recovery starting to take hold in advanced economies is becoming broader [but] potential growth in many advanced economies is very low,” said Olivier Blanchard, counsellor at the IMF in the WEO report. “Although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased.”
Growth in the electronics industry is uneven, too, although executives are seeing current economic forecasts as encouraging. Officials at the Semiconductor Industry Association (SIA) believes the larger economy is expanding slowly but notes this would be enough to drive chip growth for the next several quarters. Current forecasts from the World Semiconductor Trade Statistics is for global semiconductor sales to expand 4.1 percent this year to $313.6 billion and then up to $327.3 billion in 2015.
“Semiconductor sales performance has become increasingly tied to global GDP performance,” said Falan Yinug, director, industry statistics & economic policy at the SIA in a recent blog post. “An improved global macroeconomic environment in 2014 and 2015, as reflected in growth in global GDP, is likely to have a positive effect on semiconductor sales.”
The IMF is forecasting the global economy would grow 3.6 percent in 2014, up from 3 percent in 2013 and then rise to 3.9 percent in 2015. Emerging economies are expected to continue driving much of the 2014 growth with China slowing down to approximately 7.5 percent from 7.9 percent in 2013 while the economy of sub-Saharan Africa is expected to improve 5.4 percent compared with 4.9 percent in each of the previous two years. The United States is forecast to rise 2.8 from 1.9 percent while Euro area countries should turn last year’s 0.5 percent contraction into a 1.2 percent growth spurt. Other advanced economies should also grow at 3.2 percent versus 3 percent in the prior year, the IMF said.
Concerns abound that even these modest projections may be at risk. Geopolitical disturbances have increased since the second half of 2013 and many of these are threatening to crimp economic growth in various parts of the world. And while the financial crisis of the last couple of years has abated, there are still pockets of concerns even in advanced economies where the IMF is warning of lags in inflation projections due to downward commodity price pressures.
“It has long been our view that the U.S. economy will finally jump to a higher pace of growth this year. Since the recovery began almost five years ago, real GDP has grown just over 2 percent per year. Growth should accelerate closer to 3 percent this year, and to 4 percent in 2015. While the economy hit a pothole in the first quarter, this outlook remains intact,” said Mark Zandi, an economist with Moody’s Analytics in a report.
“For this optimism to be realized, of course, consumers must continue to do their part; the slowdown in the emerging world must not intensify, and simmering geopolitical risks must not boil over. U.S. businesses must also become less risk-averse, hiring and investing with more gusto than they have recently. And the housing recovery must continue,” Zandi added.
The IMF report warns, however, that the global economy is still facing many challenges. “The global recovery is still fragile despite improved prospects, and significant downside risks – both old and new – remain,” it said in the WEO report. “Recently, some new geopolitical risks have emerged. On old risks, those related to emerging market economies have increased with the changing external environment.”
What does all this mean for the high-tech market and the supply chain? First, the growth of the sector will be as uneven as the regional numbers trotted out in the World Economic Outlook report. Some sectors are shining brightly – automotive, for example – while others are either showing piddling growth or headed for a small decline. So-called killer applications, including the Internet of Things (IoT) have not triggered the expected increase in demand and inventory replenishment that electronic industry executives like Gerry Fay of Avnet Inc. believes are critical to driving up average selling prices and profit margins.
“The world is still in a very low growth environment although there are some growth engines that we believe will have some positive impact,” Fay, global president of Avnet Electronic Marketing division said during a recent interview. “The projected semiconductor growth rate is better than it has been the last couple of years but it’s not that much better.”
Secondly, forecasts will continue to be treated suspiciously by component suppliers, distributors and electronic manufacturing services (EMS) providers. In response to an environment described by Avnet’s Fay as “murky,” companies will be loath to write big capital expenditure checks and may delay big item purchases until they see clearer signs of rising demand, according to economists. The latest U.S. government statistics bear this out. The U.S. Commerce Department today said orders for durable goods rose in April buoyed by an increase in defense spending and a hike in orders for fabricated metal products, electrical equipment and transportation equipment.
“There is not a dramatic case for companies to expand capacity because they don’t think the economy will improve dramatically,” a Reuters report quoted Mark Vitner, an economist with Wells Fargo Securities as saying in response to the Commerce Dept. data.
More Hewlett-Packard Job Cuts
In fact, some companies in certain high-tech markets are busy cutting back to improve profitability. Hewlett-Packard Co. is one of these. The company is set to reduce payroll by 16,000 over the next year, continuing a series of drastic cost-reduction programs implemented by CEO Meg Whitman as part of her plans to make the business more competitive. By the time the rounds of workforce reduction is finished, HP would have lowered its payroll by “as many as 50,000” people, according to Whitman.
“No company likes to reduce their workforce but the reality is that HP must be maniacally focused on continuous improvement in our cost structure,” Whitman said during the company’s recent conference call with analysts. “We believe this further alignment along with the expected investments in innovation and infrastructure set us up as a force to be reckoned with in the rapidly shifting markets where we compete.”
Unwittingly, Whitman may have put her finger on the greatest challenge facing high-tech companies from the uncertainties posed by the larger economy. Fast change has become the norm in the industry and most management appear justified in continuously reviewing the assumptions underlying their projected sales and spending forecasts. For 2014, many of these economic assumptions have proven to be brittle in cases and slippery in other markets.
Based on current demand and supply conditions, it would be safe to assume 2014 will not end with a sizzle for the electronics industry. It’s unlikely also to end on a downward spiral with sales tumbling and orders on hold. Industry observers don’t expect rampant job cuts anywhere close to the size of what HP is doing but they also don’t see hiring accelerating and are certainly not projecting massive capacity addition or inventory replenishment.